Analyzing big data for the details on AFAs

The big buzz word in the legal industry these days is big data. It seems everywhere I turn people are citing enormous amounts of data. I believe in the power of numbers – and when used in the right context, at the right moment, numbers can tell a powerful story.

I’ve heard experts in the legal industry state that the usage of alternative fee arrangements (AFAs) has remained relatively flat, despite the buzz about the death of the billable hour. Yet I regularly talk to progressive leaders of legal departments and law firms who tell me about non-hourly work they are doing.

During 12 years in the legal industry, I have seen many examples of creative approaches to billing and well informed business decisions being made by both legal departments and law firms. The industry is moving forward, albeit more slowly than some other industries.

The tricky aspect of using data is that people often take it at face value, without understanding the details that make up the whole. My hypothesis is that a lot of the easier legal projects were first chosen for AFA experiments by firms many years ago. Insurance and IP matters are good examples.

However, in recent years, legal departments and law firms have slowly become more creative in finding non-hourly arrangements for more complex work to help their clients manage and predict legal expenses while still providing a comfortable level of profitability for law firms. Indeed, for some forward-looking firms, AFAs have become a competitive advantage.

After reading comments from an AFA naysayer recently, I put on my data scientist hat and got to work dissecting large volumes of data. My source in this case, the data is derived from CounselLink Insight, a database which in aggregate has billions of dollars in invoices since 2009.

The first thing I readily gleaned: At a high level, the percentage of matters with some sort of alternative fee structure has been fairly constant, between 11 percent and 13 percent from 2009 through 2012. That lines up with other analyses that showed lack of growth in AFAs.

But to test my hypothesis, I examined the details and focused my analysis on litigation work. Litigation is complex, it represents by far the largest portion of legal fees in my data set, and there is a high volume of matters spanning many industries. In fact, I tapped data from invoices associated with more than 30,000 litigation matters.

Digging into litigation matters with AFAs delivered interesting results. First, the portion of litigation matters with some form of alternative fee structure closely mirrors the overall AFA trend cited above. It’s a little higher, however, for litigation matters, with rates between 12 and 14 percent.

In addition, I was interested in exploring the total fees that are being paid under alternative structures. If the percentage of fees from AFAs is growing more quickly than the percentage of matters under AFAs, this suggests that more companies and law firms are becoming comfortable with creatively pricing large, complex matters.

Here’s how the numbers played out:

Despite the fact that the percentages related to the fees are lower than the percentages related to the matters, the trend revealed by this analysis demonstrates the gap is narrowing. In fact, the percentage of litigation fees captured under an alternative fee structure tripled between 2009 and 2011.

My analysis provides compelling evidence that material legal fees are being billed increasingly under non-hourly arrangements. As we close in on the end of 2013, we’re about to embark on another deep dive into the details data, with the added ability of looking at a five year trend. Having taken snapshots of the data in the interim, I’m confident in saying if your legal department hasn’t analyzed opportunities to use AFAs, this may be a good time to jump on the bandwagon and see where you can find cost savings and predictability.